Can my own LLC or a family member lend me the money for the replacement property?

Section 1031(f) polices swaps with relatives, not loans from them

A note from a relative does not put you inside §1031(f). That subsection bites where "a taxpayer exchanges property with a related person" and, before the date two years after the last transfer that was part of the exchange, either side disposes of what it received.

Lending is not exchanging. Your father's money does not make him a party to the exchange, and it does not turn Form 8824 line 7 into a "Yes" — that line asks whether the exchange of the property given up or received was made with a related party, directly or through an intermediary.

The answer flips if the same relative is the person selling you the replacement property, or if a disregarded entity you own is on either side of the deed. Both situations are covered at who counts as a related party and the two-year rule for related-party exchanges.

New borrowing cancels old borrowing dollar for dollar, whoever wrote the cheque

Relief from the mortgage on the property you sell counts as money. Reg. §1.1031(d)-2 provides that consideration received in the form of an assumption of liabilities "is to be treated as money received by the taxpayer upon the exchange, whether or not the assumption resulted in a recognition of gain or loss."

The same regulation then lets what you give cancel it: "consideration given in the form of cash or other property is offset against consideration received in the form of an assumption of liabilities." A note you sign at the replacement closing is exactly that kind of consideration.

Nothing in that sentence identifies a lender. A private note to your own S-corp, a seller carryback, an unsecured family note and an agency loan all land in the same place, so long as each is genuine. The offset refuses to run in the other direction, which is the point of does a bigger loan offset cash I keep.

Six markers separate a note from a disguised distribution

Reg. §1.166-1(c) supplies the standard an examiner applies to family paper: a bona fide debt "arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money," and "a gift or contribution to capital shall not be considered a debt."

Assemble the file so each item below can be ticked off without anyone having to ask you a question.

• A written promissory note executed on or before the replacement closing, stating principal, maturity and a payment schedule
• Interest at no less than the applicable federal rate for the month the note is made, so §7872 has nothing to impute
• A recorded mortgage or deed of trust, which is also what the title company needs before it will issue a loan policy
• Payments leaving your own account on the dates the note names, and landing in the lender's
• Interest reported as income by the lender; §267(a)(2) holds your deduction until the day the lender takes it into income
• No side letter, email or spoken understanding that repayment will be excused later

The money cannot start in the exchange account and come back as a loan

If an entity you control is capitalised with your exchange proceeds and then lends them back to you, you have already received the money. Under Reg. §1.1031(k)-1(f)(2) you are in actual receipt once you obtain the funds or their economic benefit, and a circular loan hands you both at once.

The intermediary's wire has to travel to the replacement closing and nowhere else. Pledging the account, borrowing against it or circling it through an affiliate is the subject of can I touch, borrow against or pledge my exchange funds.

A single-member LLC lending to its own member fails for a separate reason. An entity with one owner has no separate federal existence under Reg. §301.7701-3(b)(1)(ii), so borrower and lender collapse into one taxpayer and no debt exists. Use a regarded lender instead: an S-corp, a multi-member LLC, a non-grantor trust or an individual. Which LLCs can do a 1031 sets out the classification test.

Below-market family notes: the AFR, the $10,000 day test and the $100,000 cap

Charge too little and §7872 rewrites the deal: forgone interest is "treated as transferred from the lender to the borrower, and retransferred by the borrower to the lender as interest." The floor is the applicable federal rate, which §1274(d)(1)(B) has the Secretary determine every calendar month for the month that follows.

Term selects the rate. Section 1274(d)(1)(A) applies the short-term rate to a note of three years or less, the mid-term rate over three but not over nine years, and the long-term rate beyond nine. Rev. Rul. 2026-19 put the October 2026 annual AFRs at 4.25%, 4.61% and 5.22%.

Two reliefs exist, and both are limited to gift loans between individuals. Section 7872 is switched off on any day the loans between the two of you total $10,000 or less, and while they stay at or below $100,000 the amount retransferred as interest cannot exceed the borrower's net investment income, treated as zero where that income is under $1,000.

Worked hypothetical: a $460,000 mortgage replaced with a note to a family trust

Round hypothetical numbers. You sell a rental for $1,150,000, the $460,000 mortgage is paid off at closing, costs take $35,000, and $655,000 reaches the intermediary. You buy a replacement at $1,150,000.

That leaves $495,000 to find. A ten-year note to your parents' non-grantor trust at 5.22%, October 2026's long-term annual AFR, secured by a first deed of trust and paid monthly from your account, supplies it. Under Reg. §1.1031(d)-2 the $495,000 you give offsets the $460,000 of mortgage relief, so no debt boot surfaces.

Strip the note out and the tax moves, though not into the exchange. Cash the trust simply hands you still offsets the relief when you spend it on the purchase, but you have taken a gift: a Form 709 may be due, the trust gets no bad-debt deduction under Reg. §1.166-1(c), and the identical money coming out of a corporation you own is a distribution to you.

When the paperwork is more trouble than the loan is worth

The debt leg does not have to be borrowed at all. A trust interest that already carries non-recourse financing replaces the mortgage without an underwriter, a note or a family conversation; see can a DST's loan count as replacement debt and the higher-leverage cash out DST.

You can also cover the gap with your own money instead, which changes your basis rather than your debt; adding your own cash to the exchange works through that arithmetic.

Confirm the loan terms, the interest reporting and the gift-tax side with your CPA or attorney before the note is signed, because the documents have to be right on the day of the closing rather than at filing time.